What are Pension Funds?

Who does not want to be financially secure after they retire? However, only thinking will not help. One needs to take adequate actions and plan their investments to receive robust financial coverage for old age. Haven’t you opted for such an investment plan yet? 

Don’t worry. We got you covered! 

Pension fund investments are the best means to achieve financial stability. Pension funds allow investors to invest money into debt instruments like the safe government pension funds (also called government securities) or equities. 

Investing in pension funds implies that the risk is balanced by the prospect of higher returns generated by the investment. If an investor is willing to take more risk, they can increase the percentage of their funds and invest more in equities. If they are looking for lower yet stable returns, they can invest a significant portion of their money into debts and government securities.

Key Takeaways

• Pension funds are an affordable, disciplined, and secure way to plan for your old age or retirement.
• There are 6 types of pension funds. 
• Get your family protected by choosing a Uti retirement benefit pension fund or national pension fund. They provide death benefits, guaranteed income to cater to your financial requirements, and more. 

The Basics: What are Pension Funds?

Do you know what the best pension fund is? The one that amplifies your money over the years before retirement is an ideal pension fund investment you can opt for. 

Pension funds are retirement plans that ask you to invest a portion of your income into the national pension fund or government pension fund schemes. 

Even if you have ample savings in your bank account, you still need a pension plan to help you deal with ever-growing inflation. The primary objective behind pension funds is to provide a regular income to every individual post-retirement. 

One of the oldest and most recognised pension funds is the UTI retirement benefit pension fund which helps investors create a financial cushion in the long term by simply contributing a specific amount every year/month until retirement. The insurer is given back the amount at regular intervals of time as pensions and annuity. This fund is also categorised under Section 80C of the Income Tax Act, 1961, and serves as a tremendous tax-saving tool. 

Did You Know?

All GEPF members pay 7.5% of their pensionable salary towards the national pension fund. 

How do Pension Funds Work?

You can only calculate the investment amount appropriately after understanding how the pension funds work. The same applies to retirement plans. It is imperative to know how the pension scheme works to replace the income source that caters to your future financial needs. 

The primary purpose of investing in pension funds is to earn a stable source of living after your retirement. In addition, these plans also serve well in emergencies where you need a fallback option in case your savings fall short. But, the question is, how does the pension fund work, and the best pension fund that can solve your purpose? 

This investment plan requires paying a specific amount every month/year. It will enhance your financial security by ensuring that you receive regular income after retirement. However, it is imperative to predetermine your financial needs and investment goals before opting for a national pension fund. If you want to build a corpus and have a few years left until your retirement, you can immediately opt for a suitable plan that meets your needs. 

You can also choose the Uti retirement benefit pension fund or any other government pension fund, even at an early age, to accumulate a larger sum of money at the time you retire. 

Remember, investing in pension funds makes you eligible to receive pension benefits when your plan reaches maturity. One can further utilise their maturity amount in the following ways:

• Purchase a retirement annuity plan. 
• Withdraw the amount in one go.
• Partially withdraw the maturity amount and invest the remaining. 

Did you know?

More than 12% of the workforce have invested their funds under pension funds in India. 

Types of Pension Funds in India

There are different types of pension funds available in India to cater to the requirement of insurance seekers. After identifying your investment goals, one can opt for the following pension funds in India:

Deferred Annuity

This plan requires investors to pay a single or daily/systematic premium to build a corpus over a specified tenure.

Annuity Certain

The policyholder is provided with a series of payments for a set period of years. Majorly, this investment option is offered by insurance companies wherein annuity may also be taken as a lump sum. 

Immediate Annuity

These funds enable you to receive annuities immediately in the form of pensions. All you need to do is choose among various annuity plans and the sum you want to invest. 

National Pension Scheme

Being one of the compelling national pension funds offered by the government of India, NPS requires individuals to invest a portion of their income in a pension plan. This amount accumulated with compound interest will be paid out to the beneficiary once they retire.

Life Insurance in Pension Plans

If the policyholder dies, their family will receive a lump sum payout under this pension plan. However, the insurance payout for this plan is lower compared with a standalone insurance plan. 

Life Annuity

Life Annuity remains active until the insured passes away. The spouse or the family of the insured will be entitled to receive the pension payout after the policyholder dies. 

Did you know?

According to the Central Board of Direct Taxes, all senior citizens must submit a declaration form 12BBA to specified banks if they want relief from not filing the ITR.

Pros and Cons of Pension Funds

Policyholders benefit from investing their money in pension funds. Want to know what all benefits it includes? Let’s get started: 

Pros 

1. Provides death benefits for the financial security of your family. 

2. Customises your retirement plan to provide you and your family with additional protection. 

3. Long-term savings regardless of whether you choose an option for receiving multiple payments for small amounts or lump sum payments. 

4. Option to choose how you want to get paid will let your corpus earn more interest payouts. 

5. Negates the effect of inflation by paying a sum of one-third of the accumulated corpus during your retirement.

6. Access a lump sum amount during an emergency or cover one’s long-term health care.

Cons

While the above mentioned were some advantages offered by pension funds, there are certain setbacks associated with these plans, including

1. Taxation on the annuity is not exempted

2. Limited amount of deduction allowed, up to 1.5 lakhs

3. Best suited for early investors to get a significant return

4. High returns require higher risk-taking as safer investments may not prove potent to override the fear of inflation. 

Word To Remember

PPF

PPF (Public Provident fund) is a popular long-term saving investment tool that aims to provide retired individuals with financial security, just like Pension funds. The significant difference between PPF and pension funds is that PPF is a debt tool, while pension funds are a combination of both debt and equity instruments. 

Conclusion

Once you retire, it will be challenging to take the burden of expenses and meet your future needs. Therefore, opting for the best pension fund is a critical decision one must take at an early stage of their life. 

However, creating a substantial retirement plan is overlooked by many individuals, which makes a considerable difference between realistic return expectations and a desired standard of living. So, opt for a pension fund that best meets your goals to create the life you want to live! 

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